UK Government Debt Still as Popular as Ever
On Tuesday 2nd of September 2024, the appetite for UK Government Bonds remained as strong as ever as the government received orders of £110 Billion (USD144 Billion) in orders for a new sale of Gilts (UK Government Bonds), the first sale via banks* since a Labour landslide election victory two months ago. The UK Treasury managed to raise via their executive agency the DMO (Debt Management Office) GBP8 Billion on the sale of a gilt which matures in January 2040 offering a coupon of 4.375%**.
*Banks / Bookrunners – Banco Santander SA, HSBC Holdings Plc, Bank of America Corp, Lloyds Bank Group Plc and Goldman Sachs Group Inc.
**Gilt Maturing 2040 – This security is priced at 4 Basis Points over comparable notes.
According to experts, this is the largest ever demand on record where demand is compared to the size of the sale, and data shows that the order book matched that of June this year where a similar record was set. This latest offering and take-up does, according to analysts, show a trust by investors in this new Labour government who are indeed under pressure to fill a hole in the UK’s budget. Furthermore, data reflets that growth in the United Kingdom in Q1 and Q2 of 2024 outstripped that of the other G7 Nations, giving investors optimism regarding the near-term growth of the country.
Experts suggest that the outsized orders for this gilt not only reflects a trust in this government but also that investors are grabbing yields that are still elevated before the Bank of England introduce yet another rate cut. The head of fixed-income strategy at Saxo Bank said, “The recent successful gilt sale is primarily fueled by long-term investors seeking to lock in yields above historical averages”, they also added that if inflation persists then long-term debt is susceptible to even higher yields. Data provided by analysts show government borrowing as higher than expected in Q1 and the first month of Q2 of the fiscal year despite the economy being stronger
Experts go on to suggest that the new Chancellor of the Exchequer, Rachel Reeves, will either have to cut spending or raise taxes to meet the fiscal rules that Labour have kept from the previous conservative government. Cutting spending seems hardly likely as the chancellor has already announced on 29th July 2024 an above-inflation pay rise of 5.5% to 6% to most NHS workers, teachers, and the armed forces. She has also offered medics in England a 22.3% average pay rise, all of which suggest that the tax avenue is where the chancellor intends to go as the these pay rises amount to circa GBP9.4 Billion, however unpopular cuts elsewhere such as the winter fuel allowance she hopes will help balance the pay rises. This is a new government and only time will tell if future gilt sales are just as popular as the recent 2040 maturity bond.
